Deck 8: Securities Law Considerations When Obtaining Venture Financing

Question 1

The Securities Act of 1933 is the main body of federal law governing the creation and sale of securities in the United States.

Answer 1

True

Question 2

Offerings and sales of securities are regulated under the Securities Act of 1933 and state blue-sky laws.

Answer 2

True

Question 3

The Securities Exchange Act was passed in 1933, and the Securities Act was passed in 1934.

Answer 3

False

Question 4

The Investment Advisers Act of 1940 provides a definition of an investment company.

Question 5

Title III of the JOBS Act of 2012 establishes a small offering registration exemption and calls for SEC rules relating to the sales of securities to an Internet "crowd" (securities crowdfunding).

Question 6

It is usually easier to transfer ownership in a proprietorship relative to a corporation.

Question 7

Regulation of investment companies (including professional venture capital firms)is carried out under the Investment Company Act of 1940.

Question 8

The typical business organization for a venture in its rapid-growth stage is a partnership or LLC.

Question 9

The trading of securities is regulated under the Securities and Exchange Act of 1964.

Question 10

The objective of the Jumpstart Our Business Startups (JOBS)Act of 2012 is to stimulate the initiation, growth, and development of small businesses.

Question 11

Title II of the JOBS Act of 2012 eliminates the general solicitation and advertising restriction for Regulation D 506 offerings.

Question 12

Investor liability in a proprietorship or corporation is unlimited.

Question 13

The Investment Company Act of 1940 defines investment companies and excludes them from using some of the registration exemptions originating in the 1933 Act.

Question 14

Investor liability in a limited liability company (LLC)is limited to the owners' investments.

Question 15

State laws designed to protect high net-worth investors from investing in fraudulent security offerings are known as blue-sky laws.

Question 16

Ventures in the rapid-growth stage often need to seek new investors through large private or public offerings.

Question 17

The life of a proprietorship is determined by the owner.

Question 18

Blue-sky laws are federal laws designed to protect individuals from investing in fraudulent security offerings.

Question 19

The Securities Exchange Act of 1934 provides for the regulation of securities exchanges and over-the-counter markets.

Question 20

According to the Investment Advisers Act of 1940, a bank would not be classified as an "investment adviser."

Question 21

Regulation A, while technically considered an exemption from registration, is a public offering rather than a private placement.

Question 22

SEC Rule 147 provides guidance on the issuer's diligent responsibilities in assuring that offerees are in-state and that securities don't move across state lines.

Question 23

SEC Regulation D took effect in 1932 and provides the basis for safe harbor as a private placement.

Question 24

A Rule 504 exemption under Regulation D has no limit in terms of the number and qualifications of investors.

Question 25

Securities crowdfunding occurs when a large number of investors try to buy stocks at the same time.

Question 26

A private placement, or a transaction by an issuer not involving any public offering, is exempt from registering securities.

Question 27

The Securities Act of 1933 provides a very narrow definition as to what constitutes a security.

Question 28

Accredited investors are specifically protected by the Securities Act of 1933 from investing in unregistered securities issues.

Question 29

The definition of an "accredited investor," initially defined in the Securities Act of 1933, was expanded in Rule 501 of Regulation D.

Question 30

Regulation A offerings are limited to $10 million and do not have limitations on the number or sophistication of offerees.

Question 31

The two basic types of exemptions from having to register securities with the SEC are security and transaction exemptions.

Question 32

SEC Regulation D requires the registration of securities with the SEC.

Question 33

In general, while there are specific exceptions, public offerings of securities in the United States must be registered with the SEC.

Question 34

An early-stage venture that is not an investment company and has written compensation agreements can structure compensation-related securities issues so they are exempt from SEC registration requirements.

Question 35

Rule 504 under Regulation D has a $2 million financing limit (i.e., applies to sales of securities not exceeding $2 million).

Question 36

In SEC v. Ralston Purina (1953), the U.S. Supreme Court took an important step toward defining a public offering for the purposes of Section 4(2)of the Securities Act of 1933.

Question 37

The JOBS Act of 2012 created several important changes in Rule 506 of Regulation D and the expanded version of a Regulation A-like offering.

Question 38

Regulation A issuers are allowed to "test the waters" before preparing the offering circular (unlike almost all other security offerings).

Question 39

Regulation A allows for registration exemptions on private security offerings so long as all investors are considered to be financially sophisticated.

Question 40

A Regulation D: Rule 506 offering has no limit in terms of the dollar amount of the offering but is limited to 35 unaccredited investors.

Question 41

Which of the following statements regarding the Securities Act of 1933 is not true?

A)it was passed in response to abuses thought to have contributed to the financial catastrophes of the Great Depression
B)it covers securities fraud
C)it requires securities to be registered formally with the federal government
D)it focuses on those who provide investment advice

Question 42

Rule 503 of Regulation D states that a Form D should be filed with the SEC within six months after the first sale of securities.

Question 43

Efforts to regulate the offerings and sales of securities take place under which of the following securities laws?

A)the Securities Act of 1933 and state blue-sky laws
B)state blue-sky laws and the Securities and Exchange Act of 1934
C)the Securities Act of 1933 and the Securities and Exchange Act of 1934
D)the Investment Company Act of 1940 and the Investment Advisers Act of 1940

Question 44

The returning of all funds to equity investors as a common remedy for a fouled-up securities offering is called:

A)just action
B)fraud
C)second-round financing
D)a rescission

Question 45

The efforts to regulate the trading of securities takes place under which of the following securities laws?

A)the Securities Act of 1933
B)state blue-sky laws
C)the Securities and Exchange Act of 1934
D)the Investment Company Act of 1940

Question 46

The JOBS Act of 2012 does not provide for which of the following?

A)establishes a new business classification called "Emerging Growth Company"
B)lifts restrictions on general solicitation and advertising for Regulation D 506 accredited investor offerings
C)changes the maximum amount to be raised under a Regulation A-like offering to $50 million
D)prohibits the use of securities crowdfunding for the sale of securities

Question 47

One of the monetary requirements for individuals or natural persons as accredited investors as defined in Rule 501 of Regulation D is individual annual income greater than $500,000.

Question 48

State securities regulations are referred to as:

A)Regulation A legislation
B)stormy-day laws
C)blue-sky laws
D)SEC oversight legislation

Question 49

Which of the following statements regarding securities law is not true?

A)ignorance is an acceptable defense
B)security regulators may alter your investment agreement to the benefit of the investors
C)the Securities Act of 1933 gives the SEC broad civil procedures to use in enforcement
D)the Securities Act of 1933 gives the SEC some criminal procedures to use in enforcement

Question 50

Unless your security is exempted, what section of the Securities Act of 1933 requires you to file a registration statement with the SEC?

A)Section 1
B)Section 2
C)Section 4
D)Section 5

Question 51

Ventures that reach the survival stage of their life cycles and seek first-round financing are typically organized as:

A)proprietorships or partnerships
B)LLCs or corporations
C)corporations or proprietorships
D)partnerships or LLCs

Question 52

One of the monetary requirements for individuals or natural persons as accredited investors as defined in Rule 501 of Regulation D is a net worth greater than $1,000,000.

Question 53

Investor liability is unlimited under which of the following types of business organizational forms?

A)proprietorship
B)limited liability company (LLC)
C)C corporation
D)S corporation

Question 54

None of the following create any securities registration responsibilities except :

A)securities issued by state governments
B)securities issued by publicly held companies
C)securities issued by banks
D)securities issued by the federal government

Question 55

Which of the following is not a security?

A)treasury stock
B)debenture
C)call option
D)real property

Question 56

Which title of the JOBS Act of 2012 established a small offering registration exemption involving the sales of securities to an Internet "crowd"?

A)Title I
B)Title II
C)Title III
D)Title IV

Question 57

Which of the following statements about registering securities with the SEC is not true?

A)it is a time-consuming process
B)it requires the disclosure of accounting information
C)it is an inexpensive process
D)it provides information to prospective investors

Question 58

The U.S. federal law that impacts the creation and sales of securities is the:

A)Securities Exchange Act of 1934
B)Securities Act of 1933
C)Investment Company Act of 1940
D)Investment Advisers Act of 1940

Question 59

Rule 502 of Regulation D focuses, in part, on resale restrictions imposed on privately placed securities.

Question 60

Which of the following is not a requirement for registration of securities with the SEC?

A)the name under which the issuer is doing business
B)the name of the state where the issuer is organized
C)the names of all products sold by the issuer
D)the names of the underwriters

Question 61

An offering that raises $10,000,000, involving 35 unaccredited investors and 100 accredited investors, might be exempt from registration under:

A)Section 4(a)5
B)Regulation D: Rule 504
C)Regulation D: Rule 506
D)Regulation A

Question 62

Security exemptions from registration with the SEC do not include which of the following?

A)securities issued by banks and thrift institutions
B)government securities
C)intrastate offerings
D)securities issued by large, high-quality corporations

Question 63

Rule 506 of Regulation D is limited in terms of the number of unaccredited investors to:

A)20
B)25
C)35
D)40

Question 64

Which of the following is not a characteristic of Regulation A?

A)an offering is limited to $50 million
B)the number of offerees or investors is limited to 35
C)the offering is a public offering
D)the securities issued can generally be freely resold

Question 65

While Section 4(a)2 does not limit the dollar amount of an offering, the interpretation of the law has stipulated that the:

A)investors must be sophisticated
B)number of investors must be limited to 35
C)funds must be raised within a 12-month period
D)offering must be extended to the public, and not only investors who have a relationship with the issuer

Question 66

Which of the following is a requirement of natural persons to be accredited investors under Rule 501 of Regulation D?

A)net worth greater than $5 million
B)total assets greater than $1 million
C)individual (single)annual income greater than $200,000
D)stock market portfolio greater than $2 million

Question 67

Which of the following is not an exemption method for making an offering exempt from SEC registration?

A)4(a)2 private offering
B)accredited investor
C)Regulation Z
D)Regulation A

Question 68

Which of the following rules under Regulation D has a $5 million financing limit?

A)Rule 503
B)Rule 504
C)Rule 506
D)Rule 507

Question 69

Which of the following statements about Regulation A is not true?

A)issuers are allowed to "test the waters" prior to preparing the offering circular
B)after filing a SEC statement, the issuer can communicate with perspective investors orally, in writing, by advertising in newspapers, on radio and on television, or via the mail to determine investor interest
C)issuers can take commitments or funds if the interest level is insufficient
D)the issuer can drop a Regulation A filing

Question 70

Which of the following is not a condition of a Regulation D offering under Rule 502?

A)integration
B)sophistication
C)information
D)solicitation

Question 71

In the Ninth Circuit Court of Appeals decision on SEC v. Murphy , all of the following were considerations in determining an offering to be a private placement except :

A)there must be an arm's length relationship between the issuer of the security and the prospective purchaser
B)the number of offerees must be limited
C)the size and the manner of the offering must not indicate widespread solicitation
D)the offerees must be sophisticated

Question 72

Rule 504 of Regulation D limits the total number of investors to:

A)35 total investors
B)100 total investors
C)35 unaccredited investors and any number of accredited investors
D)none of these choices; there is no limit on the number of accredited or unaccredited investors

Question 73

Offerings exempted from registration under Rule 504 of Regulation D may raise up to $5 million in a:

A)6-month period
B)9-month period
C)12-month period
D)24-month period

Question 74

Rule 501 of Regulation D expands the categories of accredited investors. Which of the following is not one of the categories?

A)any organization formed for the specific purpose of acquiring securities with assets in excess of $5 million
B)any director or executive officer of the issuer of securities being sold
C)any individual whose net worth exceeds $1 million
D)any partnership

Question 75

Which of the following SEC registration exemptions has no financing limit and permits a maximum of 35 unaccredited investors?

A)Section 4(a)2
B)Regulation D: Rule 504
C)Regulation D: Rule 506
D)Regulation A

Question 76

Exemptions for private placement offerings and sales of securities limited to $5 million are covered under which of the following Regulation D rules?

A)Rule 501
B)Rule 502
C)Rule 503
D)Rule 504

Question 77

Which SEC regulation took effect in 1982 and provides the basis for safe harbor as a private placement?

A)Regulation A
B)Regulation B
C)Regulation C
D)Regulation D

Question 78

Which of the following statements about Regulation A is not true?

A)it is shorter and simpler than the full registration
B)it does not have limits on the number or sophistication of investors
C)it is a public offering rather than a private placement
D)it requires no offering statement be filed with the SEC

Question 79

The basic types of transaction exemptions from registration with the SEC are:

A)the private offering exemption and the accredited investor exemption
B)the "too-big-to-fail" exemption and the intrastate offering exemption
C)the accredited investor exemption and the public offering exemption
D)the intrastate offering exemption and the interstate offering exemption

Question 80

Which of the following exemptions involves a public, and not a private, offering?

A)Regulation D: Rule 501
B)Regulation D: Rule 504
C)Regulation D: Rule 506
D)Regulation A